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What Would You Do In This Situation?

By JLP | April 29, 2008

Let’s do a little stock market temperment quiz. I found this in an a series of articles about Warren Buffett that was published in U. S. News & World Report last summer:

…what if one stock, in particular, had seemed like a sure bet when you bought it last month. The company sells something everyone needs, is well managed, and has a consistent track record of growth—that is, until it missed Wall Street earnings expectations by a penny and got pounded down by 15 percent in a single day.

Would you:

a) Sell it and curse yourself for buying it in the first place?

b) Sit tight and do nothing until you recover your loss, then sell?

c) Smile and buy more, sure that everyone else is dead wrong?

d) Study and reconfirm your assessment of the company, then smile and buy more?

I do very little individual stock picking. That said, I would probably go with “c” or “d” because I don’t usually let the stock market get to me. The author of the article went on to say that if you answered “d” you could possibly work for Warren Buffett’s Berkshire Hathaway.

Whether you buy individual stocks or invest in mutual funds through your company’s 401(k), you have to keep your emotions in check. If you don’t, you’ll find yourself making lots of mistakes.

I know these U. S. News articles are old, but I urge you to give it a read. There’s lots of good stuff there.

Topics: Investing | 8 Comments »


8 Responses to “What Would You Do In This Situation?”

  1. Joe Says:
    April 29th, 2008 at 11:56 pm

    I’ve held Intel (intc) off and on for many years. Especially since the burst of the tech bubble, just as in your example, it misses the (often inflated) press estimates, and the stock is slammed.
    I’ve given up on it.

  2. AJC @ $7million7years Says:
    April 30th, 2008 at 1:55 am

    d) Buy more, of course. If it was a ‘buy’ before, at 15% extra discount surely it is a better buy …. soon.

    Why ‘soon’?

    Because I would do one thing that Warren Buffett can’t do, I’d use the advantage of my (smaller) size to move in only when the ‘big guys’ were buying back in … [even Warren admits that this is an advantage that us 'little guys' have over him]. AJC.

  3. james Says:
    April 30th, 2008 at 7:02 am

    if u want advice on picking stocks try MarketGuru.com, its a new financial community that allows members to share their knowledge on the stock market – i found some great advice there…

  4. Rachel @ Master Your Card Says:
    April 30th, 2008 at 9:23 am

    I hold a few shares and buy more monthly. Therefore I am always happy when the prices drop as it means that I get more for my money. I would certainly worry more about the price if I needed to liquidate them.

  5. Joe @ SimpleDebtFreeFinance Says:
    April 30th, 2008 at 11:35 am

    These are good points, and I would have to agree with choosing “d”, but only because it’s Buffet we’re talking about. To put it another way, this example is only valid because it is predicated on the investor being Warren Buffet. Because we know Buffet is a solid analyst in the companies he purchases share in, we know that the market has only presented him with an opportunity to buy at a discount.

    How many of us are as good at stock analysis as Buffet?

    BTW, JLP – thanks for the links! I’m always keen to learn more about the oracle :)

  6. Ron@TheWisdomJournal Says:
    April 30th, 2008 at 11:52 am

    I second what AJC said. If you thought a stock was a buy at $50, isn’t it much more of a buy at $42.50? Did any of a company’s underlying value really changed just because the market is an emotional wreck 99% of the time? Buy when others are fearful, sell when others are greedy.

  7. Tim Says:
    May 1st, 2008 at 6:21 pm

    there are always swings in earnings, so you have to go back to the fundamentals of why you bought the stock in the first place. however, these decisions shouldn’t be done in reaction to one up or down swing. if the reasons still exist for you to retain the stock then buy more at the now discounted price. if the reasons do not exist, then sell and look elsewhere. part of checking emotions at the door is also to release bad stocks even though you have taken a dive on the stock. the focus should be on the fundamental reasons for owning or selling the stock, not on the price of the stock.

  8. Jon Says:
    May 2nd, 2008 at 10:14 am

    This happened recently with GE. I didn’t have to study or reassess anything because I try to keep up with my investments pretty regularly anyway. I immediately bought more.

    D is good in theory if you already have another temporary investment in mind. Otherwise what are you doing with that money while you’re waiting? And you have to move very fast. Just two weeks after GE dropped substantially, it’s up 5%. Other times I’ve seen large moves after 2 days. Sometimes it takes 2 months. It smacks too much of market timing to me.

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